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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Gold, Again

*** Reflexivity ruins relief rally... Really!

*** Consumer confidence falls...eToys 'goes chapter'...
could gold be going up? 

*** Mountebank analysts..."Horrah, for the Dayaks!"...blaming 
the English...and more.

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*** The relief rally didn't last long. 

*** The Fed Funds Rate Theory of Stock Market Timing says 
that when the Fed is cutting rates, stocks will rise. When 
the Fed is raising rates, on the other hand, stocks will 
fall. "Don't fight the Fed," chime the pros. 

*** It is a simple theory, alas fatally flawed by the 
feedback mechanism of all natural systems, or what George 
Soros calls 'reflexivity'. 

*** When stocks are rising and the economy is roaring... 
investors can look ahead to the moment when the Fed decides 
that inflation, or irrational exuberance, or the wealth 
effect threaten the stability of the markets. The higher 
stock prices are bid up, the more likely the Fed is to 
switch to a tightening bias and deflate the bubble.

*** Now, the opposite feedback menaces investors - the more 
enthusiastically they respond to the 'Rate Cut' relief 
rally, the less likely it is that the Fed will cut rates.

*** Ray Devoe: "Later today commentators on CNBC and the 
media will be dissecting Mr. Greenspan's testimony to get 
some indication of what he really meant. I don't see why 
they bother, since he really means to say nothing at all."

*** "Greenspan has become a cult icon, idolized by 
stockholders for providing the background for their 
financial rewards," Devoe continues. "Two recent very 
flattering books about the Fed Chairman make him appear a 
Pope-like figure...infallible. But it would serve you well 
to keep in mind, Mr. Greenspan gets only the same 
information everyone else gets - just a day or so earlier. 
He is human, not infallible, and can make mistakes." (see: 
"Nostradamus" - The "Greenspan" Of His Time

*** "If for some reason Greenspan actually does cut rates," 
writes Bill Fleckenstein, "which I don't expect - that may 
hold the market up a little bit longer... In any case, it's 
very possible that we could see a dramatic acceleration 
from here, where all the indexes get in gear to the 
downside. That's something I still expect at some point, in 
part because the S&P and the Dow are still ridiculously 

*** After the Dow shot up 200 points on Monday, investors 
seemed to lose faith. The Dow closed down 5 points 
yesterday. The Nasdaq suffered more damage - closing down 
100 points, under 2,000 for the first time since May '99. 

*** The big losers of the day were the big techs and 
Internets. Cisco, for example, fell below $25 - down $2 for 
the day. JDS Uniphase said it was laying off 10% of its 
staff; the stock fell 15%. Gateway lost 6% after Merrill 
downgraded the stock to 'neutral'. 

*** Goldman Sachs, too, offered investors helpful 
advice...changing its rating of from 'market 
outperformer' to 'market performer'. The stock continued to 
sink, losing another 25 cents yesterday to close at $2.19. 
It was $30 last spring.

*** eToys went all the way down - it filed for Chapter 11 
bankruptcy protection. Expect a new rating from Merrill or 
Goldman any day. How about 'market vanish'?

*** Despite the losses, these Big Techs are still 
overpriced. Juniper sells at a price equal to 67 times 
earnings. Cisco is at 41 times earnings.

*** Analysts also revised downward their targets for the 
major indexes. Jeff Galvin of Credit Suisse First Boston 
had a target of 4,000 for the Nasdaq by year-end. He now 
thinks that 3,000 would be more likely. Lehman Bros. 
strategist Jeff Applegate lowered his target for the Dow 
too - from 13,000 to 12,500. "The future's not ours to 
see," Doris Day once warbled. But 1500 is probably a better 
guess for where the Nasdaq will end the year. The Dow, 
meanwhile, is more likely to be around 8,000 than 12,000.

*** Analysts, as I've pointed out many times, don't have a 
clue. Last year about this time, analysts' projected 
earnings growth for the Big Techs in the first quarter of 
2001. They came up with an average growth figure of 28%. 
Then, over the year, the forecast was revised downward to 
14%...then to 4%...and is now -19%. Mr. And Ms. Analyst 
change their minds...but only after Mr. Market changes his.

*** Philip Morris lit up yesterday; the stock rose 3.8% to 

*** Nike just did it - dropping nearly 20% in price.

*** Internets fell offline... down 7%.

*** The big winners yesterday were - would you believe it? 
- gold mining companies. Gold rose $1.60 as the dollar slid 
back. Lease rates have doubled in the last two days - to 
4.12% for one-month contracts. The CBOE gold index rose 7% 
yesterday. Is another short squeeze developing? More 

*** The Conference Board reported that consumer confidence 
slipped again in February...the 5th month in a row. It is at 
its lowest level since June of '96.

*** Lynn Carpenter: "To think I've been complaining about 
U.S. beef. It isn't as robust and tasty as it used to be-
thanks to the low-fat ninnies who gave marbling - and taste 
- a bad name, but at least it's still beef..." Lynn reports 
that in response to the mad cow scare here in Europe, 
Canada is now exporting 160 tons of viande de cheval (horse 
meat) every week to France and Germany - a historic high.

*** "Hoorah, for the Dayaks!" several Daily Reckoning 
readers e-mailed in response to yesterday's missive. "They 
are fighting an oppressive government," wrote another on 
the discussion board "...and fighting the oppression of a 
civilization that tries to make us all think and act 
exactly the same. As a US citizen, I root for the 
underdogs." What being from the US has to do with rooting 
for underdogs, I don't know. Still the Dayaks appear to have 
garnered support for their campaign of violence - thousands 
of miles away. (see: Love Them Dayaks http://www.agora-

*** "Are you English?" asked Jacqueline, my new French 
tutor last night. "I've had clients from all over the 
world," said the red-haired woman of about 65. "I like them 
all, except maybe the English."

*** No matter where you go, people manage to find some 
group not to like. The French blame the English for the Mad 
Cow disease...and just about everything else. "The English 
think themselves so superior," she elaborated without 
invitation. "Are you sure you're not English," she asked 
again, suspiciously, "you have an English accent, not an 
American one." 

*** Of course, the English return the French sentiments, 
with interest. "The wogs start at Calais," an English 
friend puts it.

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"Nobody expects gold prices to turn up soon."

This headline from the February 12th Barron's might some day 
enter into the pantheon of Great Contrarian Buy Signals.

So far, the movement in the price of gold has been 
positive, but not spectacular. Gold rose from $261 to $268. 
It rose $1.60 yesterday. Since roughly February 12th, 
the XAU mining index has risen from 46 to over 54.

Like its major competitors - the dollar, the euro and 
yen...the value of gold rests on nothing more than the 
'group feel' of the market place. In their collective 
sentiments, people could decide that an ounce of gold 
is equivalent to two suits of clothes - or only to a 
handkerchief. Over many generations, however, gold's 
purchasing power has averaged somewhere in between - 
usually at about the price of a single suit. Julius Caesar 
could have exchanged an ounce of gold for a smart toga and 
belt. So might I today, provided I didn't mind looking like 
a man in a cheap suit. (I asked my colleague, Addison, to 
verify this. He reports that you can get a suit at Marks 
and Spencer's around the corner for just $277 - almost 
exactly the price of an ounce of gold.)

A good suit, though, would cost at least 2 ounces of gold.

Over time, the supply of gold increases - but so does the 
number of people in the world, and does the supply of 
suits. (Gold seems as though it were provided by nature 
herself...for use as stable money.)

Yet, since WWII, gold has been pushed out of its monetary 
role. It is regarded as an impediment to central bankers, 
who - it is argued - need to be free to destroy their 
national currencies at whatever rate conditions warrant. 
And, over the last two decades, gold has gradually been 
dropped by private owners as well as public ones. 

But sooner or later the 'group feel' that created a 20-year 
bear market in gold will bottom out. At least, that is the 
working hypothesis of today's letter.

The Barron's article, of Feb. 12th, illustrated the despair 
into which gold investors have sunk. "It's difficult to 
find any positive news in the depressed gold market," wrote 
Cheryl Strauss Einhorn. "At around $260 an ounce, the metal 
continues to trade near its cost of production and almost 
no one believes it will rally soon."

"We are an industry incapable of realizing good returns for 
our shareholders," the article quoted Ferdi Dippenaar, of 
Harmony Gold, the world's 6th largest producer. And 
"unfortunately," he continued, "there is nothing positive 
on the horizon."

"Brokerage houses seem to agree," adds Ms. Einhorn, "In 
another sign of the times, ABN Amro gold analyst Todd 
Hinrichs threw in the towel and stopped covering the 
industry a few week ago."

"I've capitulated and moved on. The gold industry is 
essentially a very difficult place to make a dollar. There 
is nothing positive. It's as bad as it gets."

Mr. Hinrichs decided to switch to covering manufacturing - 
an industry with room to get worse.

That was only a little more than two weeks ago. Since then, 
the price of gold has risen $8. And gold stocks have done 
well. Newmont has gone from around $14 to near $17. 
Homestake has gained a dollar. And Anglo-gold, which I 
believe I suggested to you several weeks ago, has risen 
nearly $4.

What might drive gold higher? The competition, perhaps?

"How anybody would want to own the dollar here is beyond 
me," wrote Lance "Crash" Lewis in his commentary on the 
Prudent Bear yesterday. The Fed is cutting rates. Inflation 
is increasing. Recession is a real risk - and no one knows 
how severe it might be. The negative trade balance and 
private debt have reached frightening levels. The current 
account has not been so deeply in the red, compared to GDP, 
since 1816. And private debt now equals 6% of the GDP, a 
level we have never seen before.

The price of gold, and the price of the dollar, are both 
set by the 'group feel' of the market. The sentiments that 
have lifted up one money and cast down the other are, of 
course, subject to change. A man who prefers 300 dead 
presidents today might prefer an ounce of gold tomorrow; 
stranger things have happened.

But in this respect, the dollar and gold are not the same. 
The feedback mechanisms do not work the same way. As the 
price of gold falls, investment in mining declines. People 
who might have dug more gold from the ground go out of 
business. Or they may change the nature of their business. 
Mark Twain described a mining company as a "hole in the 
ground with a liar in front of it." In the recent 
bubble, several erstwhile mining companies simply dispensed 
with the hole.

The result: supplies fall. The precious metal becomes less 
ubiquitous and more precious.

But what happens to the dollar when 'group feel' turns 
against it? It falls...but where? Recession and falling 
stock prices will almost certainly be accompanied by a 
falling dollar. The Fed's reaction will be - and already is 
- to increase the supply of dollars! Just as there is no 
limit on how many 'dollars' the Fed can create...nor is 
there a limit on how worthless each of them may become.

The mob of investors, especially foreign investors, heading 
for the exits, as they suddenly realize their dollars are 
losing value... may be as hard to stop as a gang of 
drunken skinheads. If a dollar is not worth a dollar, is it 
worth 90 cents? Or 50 cents? Or 25 cents. Or nothing at 

The Gold the Golden Rule...establishes a 
limit. During the Depression, many economists argue, it 
made recovery difficult because it was so inflexible. 
During the next depression, the world may have the opposite 
problem - a money supply that is too elastic. 

Daily Reckoning readers with long memories may recall a 
headline of mine from almost exactly a year ago: "Gold to 
Rise," I wrote confidently. The gold price then was over 
$300...a level from which it declined and has not seen 
since. So, with that admission, I leave it to you to decide 
how accurate today's forecast may be:

Faced with a 'money' of no certain value...which can be 
made even less valuable by its Fed managers...people are 
likely to turn to the competition.

Gold to rise...sooner or later.

Bill Bonner, American...not English
About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: April 01, 2001

Published By Tulips and Bears LLC